Quietly, the IMF confesses that austerity does not work

Don’t say it too loudly, because it doesn’t want you to know: The International Monetary Fund admits that austerity is not working.

The IMF of course did not come out and say this directly. But it was there, unmistakably, in its World Economic Outlook published on its web site on October 9. Forecasting the world economic growth rate to continue to decline, the IMF genteelly noted that:

“Public spending cutbacks and the still-weak financial system [are] weighing on prospects.”

And please don’t complain about the bureaucratically tepid language —  you didn’t expect an IMF official to call a press conference and apologize? No you didn’t. But that is as clear an admission as we are likely to get from the horse’s mouth that cutbacks, the magic snake oil that the IMF, World Bank and other financial institutions relentlessly impose, weakens economies.

For the record, the IMF projects 2012 growth in the world’s advanced capitalist countries will be 3.3 percent and forecasts growth of 3.6 percent for 2013, both slower than 2010 or 2011. It predicts a similar rate of decline in growth among the world’s developing countries. But let’s take note of two passages in the outlook.

“The IMF said that its forecast rested on two crucial policy assumptions—that European policymakers get the euro area crisis under control and that policymakers in the United States take action [to] tackle the “fiscal cliff” and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.”

The “fiscal cliff” is the congressional agreement made earlier this year that, barring superseding action by the U.S. Congress and president, a series of steep automatic cuts to federal-government spending kicks in at the end of the year — austerity imposed by one’s own von Neumann machine. Concurrently, the IMF believes that government investment is not necessarily a bad thing:

“The main driver [of growth in Asia] will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects.”

So why do central bankers, financiers and multi-national financial institutions still preach austerity? Ideology, surely, plus arrogance and a lack of ability to admit the wisdom of financial elites is wrong. Nonetheless, at bottom such people are carrying out their class interests. If we had a different, more egalitarian economic system, and somebody came along and said, “Let’s immiserate entire countries so that a handful of financiers could remain fabulously wealthy by guaranteeing their profits” you would see the idea as insane. And it is.

There was one other tidbit — it seems that governments applying austerity programs over-estimated the savings to be accrued from them. The IMF said a common figure used by governments was to assume that for each dollar lost in government spending, 50 cents is erased from gross domestic product, an assumption used when creating austerity budgets. But, the fund said, its study of the issue has found that, since the economic collapse that began in 2008, for each dollar cut from government spending, GDP is reduced from 90 cents to $1.70.

In other words, the result of austerity is that it has accelerated economic contraction. A commentary on the Naked Capitalism web site written by a financial-industry professional caustically sums up what that re-calculation means:

“In case you missed it, this is an admission of complete and utter incompetence.”

IMF officials probably won’t be calling a press conference to admit that, either. The results of austerity across Europe has been devastating:

  • 25 percent unemployment in Spain.
  • 15 percent economic contraction in Ireland.
  • Population exodus out of Lithuania and Latvia.
  • 40 percent wage cuts and 22 percent economic contraction in Greece.

Unemployment has risen and wages reduced in the advanced capitalist countries. Demand is inevitably soft because of that — a vicious circle when 60 to 70 percent of economic activity is accounted for by consumer spending. Each country would like to get out of this impasse by exporting more, but the slowdown in economic growth has not spared any corner of the world. And although some countries might export more than they import, it is a zero-sum game — every country can’t be a net exporter.

One way to boost exports is to devalue your currency, but, here again, every country can’t devalue in relation to all others. China, Japan, Switzerland and the United States each has intervened in foreign-exchange markets in order to devalue their currencies (this is done through large-scale trading, not administrative fiat), but these actions can only go so far.

A critical problem for countries like Greece and Spain is that they don’t have their own currency, so, for them, the euro is over-valued. When imbalances force devaluation on a country, some of that devaluation can be achieved when its currency declines in value against others. But for users of the euro, all the devaluation has to come internally, through wage reductions, government spending cuts and destruction of capital values. Capitalism is a system of relentless competition in which only so many can be winners.

That competition tends to be seen through national lens; thus the form in Europe has been German bankers and politicians wagging disapproving fingers at Mediterranean neighbors. That distorted vision obscures the fact that it is only German industrialists and financiers who have benefitted; German workers have endured a decade of declining wages. And now that austerity has been relentlessly imposed in its eurozone customers, a decline in exports can’t be made up by internal demand thanks to those declining wages.

Eventually, austerity bites back — the IMF forecasts the composite eurozone economy to contract this year and increase by 0.2 percent in 2013, and Germany to grow by a mere 0.9 percent this year and next after posting four percent growth as recently as 2010. The German government has kept dissent down by acknowledging the sacrifices made by German workers, a point made repeatedly by the country’s mass media in the context of whipping up national feelings and directing those feelings against “profligate” countries on the eurozone’s southern rim.

It was thus a promising sign that the leader of Die Linke (the German Left Party), Bernd Riexinger, attended the October 9 demonstrations in Athens with Alexis Tsipras, the leader of Greece’s main Left opposition coalition, Syriza. Austerity is a cross-national offensive by financiers and industrialists to maintain their power and wealth at all costs. The response to austerity can only be cross-national. Capital does not care about borders and nations; similarly, working people can only reverse the devastating attacks on them through linking hands across borders.


8 comments on “Quietly, the IMF confesses that austerity does not work

  1. Alcuin says:

    “Capital does not care about borders and nations; similarly, working people can only reverse the devastating attacks on them through linking hands across borders.”

    Yep. But if unions can’t get their act together and mount an offensive against the capitalists in this country, how are they going to “[link] hands across borders”? How many unions endorsed Obama’s re-election? Gahhhhhhhh ……….

  2. 3D Eye says:

    The concept of the “multiplier effect” has been well understood for decades, and is central to the work of Keynes. I’m genuinely curious about the extent to which Friedman’s thinking and the “Chicago School” that Naomi Klein describes so well in The Shock Doctrine came to dominate economic discourse in the US. Clearly the Friedmanite economists that took over the IMF and the World Bank had an agenda to eliminate Keynesian ideas about economics and society, and to pretend that running a country is the same as running a corner shop. Thatcher bought into this – since her family ran a corner shop. Of course shopkeepers can’t print money if they need money, but even the stupidest shopkeepers surely understand that you have to “spend some to get some”. Clearly the refusal of the banks to lend money to small businesses for investment and for cash-flow management is having a massively harmful effect. It’s going to be interesting to see what effect Christine Lagarde has on the IMF in the medium and the long term.


    • Friedmanite ideas (“Chicago School” or “monetarism” as they are known) unfortunately gained traction during the 1970s in the U.S., and began being implemented once Reagan took office following the 1980 election. Such ideas have dominated U.S. discourse since, thanks to the tireless efforts of the corporate media and the dominance of large corporations and the range of institutions those corporations and their billionaires use to disseminate those ideas.

      But people in the U.S. are much more open than they have been in the past to alternative ideas. The quick and widespread acceptance of the message of Occupy Wall Street demonstrates that there is considerable openness to different ideas that correspond to the reality of people’s lives.

      As to Christine Lagarde, I suspect her words will amount to nothing. Reading the Telegraph article to which you linked, I think the key quotation is this: “We need action at all levels, first of all at the national level. There are many member states that are taking measures to reform their economy, to improve their competitiveness, to open up some boundaries and territories that have prevented the creation of value and the creation of jobs.”

      Those are code words that we should read as meaning roughly this: “Some countries feel themselves forced to impose harsher austerity and eliminate protections for working people, and I hope they will go further and be joined by other countries.” No matter what pretty words Ms. Lagarde uses to purport to be concerned about the effect of austerity and economic crisis, we should expect no substantial change from the IMF or its peer organizations. She did come to the IMF straight from Nicolas Sarkozy’s government and would not have been entrusted with the leadership of the IMF if she were not fully with the program. And she is.

  3. […] Greece, and indeed all of Europe needs now is an immediate halt to these destructive of austerity (which, even the IMF now agree, doesn’t work), a socialist recovery plan, with economic democracy and job-creation at the centre, and a vigorous […]

  4. […] Greece, and indeed all of Europe needs now is an immediate halt to these destructive of austerity (which, even the IMF now agree, doesn’t work), a socialist recovery plan, with economic democracy and job-creation at the centre, and a vigorous […]

  5. […] Greece, and indeed all of Europe needs now is an immediate halt to these destructive of austerity (which, even the IMF now agree, doesn’t work), a socialist recovery plan, with economic democracy and job-creation at the centre, and a vigorous […]

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